Real Estate Economists Parse October Jobs Report

The October employment report released by the U.S. Bureau of Labor Statistics last Friday reflects a familiar but troubling pattern for a commercial real estate industry desperately seeking green shoots.

While the pace of job losses continues to moderate, total non-farm payroll employment nationally has fallen by a whopping 7.3 million since December 2007. The end result is rising vacancies and falling rents across all major property types, and the industry’s woes are likely far from over.

The continuing deterioration in labor market conditions for young adults is particularly problematic for the apartment sector, according to Sam Chandan, president and chief economist of New York-based Real Estate Econometrics

“The unemployment rate for heads of households that are 24 or younger — a group that is almost exclusively renters — rose from 14.9% to 15.6% over the month,” according to Chandan, who also serves as an adjunct professor of real estate at the Wharton School of the University of Pennsylvania.

U.S. nonfarm payrolls fell in October by 190,000, including a net loss of 61,000 in construction, 40,000 in retail, and 37,000 in the leisure and hospitality sector.

Meanwhile, the unemployment rate nationally rose four-tenths of a percentage point to 10.2%, the highest rate since April 1983. What’s more, the number of unemployed persons increased by 558,000 in October to 15.7 million.

“The bad news for the economy and commercial real estate is that we are still losing jobs, and it will likely take another few months before we turn the corner,” says Hessam Nadji, managing director of research services for Marcus & Millichap Real Estate Investment Services based in Encino, Calif.

“Further, even after we turn the corner, the recovery will face a number of headwinds, and job growth will remain muted in 2010,” adds Nadji. The six- to nine-month lag between employment and occupancy trends points to rising vacancies until mid-2010.”

Encouraging signs

So what’s the silver lining in the rather gloomy October jobs report? “The fact that job losses fell below 200,000 for the month confirms the winding down of the worst employment crisis since the Great Depression,” according to Nadji. Another positive sign is the drop in first-time unemployment applications, which points to further moderation of job cuts in coming months.

“Coupled with other positive developments, such as inventory clearing and rising exports, we should be more confident that the recession has come to an end, at least technically,” says Nadji. U.S. gross domestic product in the third quarter grew 3.5% on an annualized basis, providing further evidence of recovery.

The veteran Marcus & Millichap researcher also points out that roughly half of the $787 billion federal stimulus package has yet to be spent. “The full trickle effect will not materialize until well into 2010. Ultimately, the prospects beyond 2010 are far more promising as there will be more pent-up demand for corporate spending,” emphasizes Nadji.

Employers added 34,000 temporary workers in October, which is another positive development because they are typically the first to be hired during a recovery. Lastly, revisions to the nonfarm payroll employment for August and September show that the net job losses for those two months totaled 373,000, not 464,000, a 91,000 change to the upside.

The revisions to the August and September jobs figures helped Wall Street investors look beyond the double-digit unemployment rate nationally. The Dow Jones Industrial Average rose by 17 points on Friday to close at 10,023.

October surprise

“It is not surprising to see the Bureau of Labor Statistics (BLS) adjustnumbers from previous periods,” says Victor Calanog, director of research for New York-based Reis. “At the cusp of downturns it gets even more confusing, as sometimes BLS revises numbers from positive [job gains] to negative [job losses].”

The real surprise, emphasizes Calanog, is that the unemployment rate breached 10% this year. "Most consensus estimates did place the unemployment rate in the low to mid-10s by next year, so we were headed in that direction. But 22 months into the recession, I think most people expected at least some kind of slowdown to the bloodletting."

One data point that Calanog is tracking closely is labor underutilization, known as the “U-6” because of its data classification by the Labor Department. The figure includes the officially unemployed who have looked for work in the last four weeks. It also includes discouraged workers who have looked in the past year, as well part-time workers who want to work full time.

This broad measure of unemployment, the U-6, increased from 17% in September to 17.5% in October. “Typically this number is indicative of the amount of labor that employers need to soak up before making actual new hires,” explains Calanog. “The higher this number goes, the longer the labor markets will take to stabilize and for job gains to truly be reflective of an economic recovery.”

Consumer power erodes

While job losses are moderating, unemployed persons are staying unemployed longer, according to Chandan of Real Estate Econometrics. “The mean duration of unemployment is now 26.9 weeks, up from 26.2 weeks in September. Put another way, the average unemployed person has been out of work for just over six months.”

Persons who remain employed generally have little power in wage negotiations, adds Chandan. Absent overall improvements in wages, he believes that the retail-spending outlook will be subdued through the holiday season.

The decline of 40,000 jobs in the retail sector during October may reflect retailers' soft expectations for the holiday shopping season, according to Chandan. Job losses were particularly large for stores selling discretionary items, including book and music stores. Department stores also took a hit.

“While measures of consumer sentiment and general economic activity have both improved, personal consumption trends remain weak,” concludes Chandan. “The savings rate rebounded last month following the end of the Car Allowance Rebate System program (cash for clunkers). Consumers remain cautious in making large and discretionary purchases.”